Technical Analysis

Historical studies have shown that chart patterns are consistently repeated over time. Technical analysis is the art of recognizing specific patterns that are key to growth investing.

Shakeout + 3 Alternate Entry

In his book How to Trade in Stocks (1940), Jesse Livermore describes a concept that eventually became known as a shakeout + 3 when described by William O’Neil in his book How to Make Money in Stocks.

Jesse’s idea was simple, after a shakeout to a low, if there is another shakeout that undercuts the previous low, the buy price becomes the previous low price plus 10% of that low. Jesse referred to this as a pivotal point.

The “+ 3” aspect came about as O’Neil’s example was based on a stock that was $30/share, hence, 10% of $30 is $3, so it was known as a shakeout + $3.

Calculating Shakeout + 3 Early Entry

On November 3rd, 2020 AMD setup a potential shakeout + 3 early entry. It starts with a recent low undercutting a previous low:

Using the two lows shown above, here are the steps to calculate a shakeout + 3 entry point:

Step #1 – Get two recent low values:

Original low: $73.85
Undercut low: 73.76

Step #2: Calculate prices at 5% and 10% of original low:

5% of $73.85 = $3.70
10% of $73.85 = $7.40

Step #3 – Calculate early entry range:

The range is the original low plus the 5% and 10% values from above:
Range = $77.55 ($73.85 + $3.70) to $81.25 ($73.85 + $7.40)

Step #4 – Look for an area of resistance:

As with the range, an area of resistance was not part of the original concept described by Livermore or O’Neil. Using prior resistance you can find a more logical area to enter a trade.

In the figure below I’ve highlighted the early entry range ($77.55 to $81.25). The orange line is an area of resistance, notice several times in the past the price action didn’t move beyond that level.


Shakeout + 3 Example

Here’s a cheatsheet of the shakeout + 3 pattern and how to calculate the entry price.

Power Trends Charted on Nasdaq and S&P 500

Mike Webster and Irusha Peiris recently discussed power trends on the Investing with IBD Podcast. Ajay Jani took the time to code the concept in an Excel document which shows power trends for both the Nasdaq and S&P.

The orange indicator in the charts that follow, highlights where the power trend is on. The Nasdaq chart goes back to 1984 and the S&P 500 back to 1962. Richard Moglen helped Ajay with data acquisition.

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Buying Stock on Pullback and Upside Reversal

I recently used a pullback followed by an upside reversal to buy shares in two stocks. One of the buys was within a base, which I used as an early entry. The second was a buy to add to an existing position.

It’s worth noting, I am not recommending either stock. My intention is to show how I used a pullback and reversal for two past trades.

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Facebook in 2013 and AAXN, CHGG and TWLO

Ajay Jani mentioned on Twitter it may be worthwhile to revisit Facebook’s move back in 2013 and compare with stocks over the past couple of weeks that have had similar gains in price and volume. The goal is to gain insight into how Facebook progressed after its big move up. Maybe this will foretell how stocks with similar price and volume signatures may play out in the coming weeks.

To begin, we’ll look at two charts of Facebook, paying attention to the price, volume and its upward trend. We’ll follow this with a look at three stocks, AAXN, CHGG and TWLO.

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